Terry Charlton speech to State CWA conference ... - Snowy Hydro

CWA Speech
Snowy Hydro Limited is greatly misunderstood –
misunderstood with regard to what it does, how it does it,
and who cares for it. It is misunderstood because the
Snowy Scheme has changed “forms” over the years. The
services it provides have changed and the markets in which
it operates have also changed over the years. Even the
assets have changed, but the way we use the assets has
changed even more; what is expected of the Snowy
Scheme and its “offspring” Snowy Hydro Limited has over
the last decade changed and changed forever.
It has changed because of the needs of the “markets” it
serves and because of its unique capability to meet the
evolving needs of these new markets.
So what does Snowy Hydro now do…..
Water
We do not own water, we do not sell water! We are
controlled by a Government water licence.
We collect and store water, and we release a fixed amount
each year, as per our water licence, into storages controlled
by the New South Wales’ Government (Blowering Dam)
and the Murray Darling Basin Commission (Hume Dam) –
both dams are from where the New South Wales’
Department of Natural Resources and the Murray Darling
Basin Commission – not Snowy Hydro – release to the

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irrigators. Snowy Hydro Limited does not control annual
releases to the irrigators.
But we are now able to do more than release an annual
amount of water from the Scheme into Government dams.
We now greatly help irrigators and farmers in ways not
previously undertaken.
Since corporatisation, and since being restructured such
that we henceforth function as any normal market, growth
and shareholder return oriented company, Snowy Hydro
Limited has been able to offer, when most needed, supply
risk management products to the irrigators downstream of
the dams owned by the Murray Darling Basin Commission
and New South Wales Department of Natural Resources. In
essence, by making special arrangements with the
Governments’ Agencies (Murray Darling Basin Commission
and Department of Natural Resources), and after
understanding the needs of the irrigators and then by
coming to sensible and mutually beneficial commercial
arrangements directly with the irrigators, we have been able
to offer special timing of release commitments. In this way
we have been able to assure the irrigators that they will get
a specified amount of water in specified months…..this is
not something the Government owned Snowy Mountains
Hydro-electric Authority would or could do – and so we are
now meeting the special needs of irrigators and this has

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substantial and demonstrable benefit to country towns
where economies depend on farming success.
This form of innovation, discouraged under the pre
corporatised business model that was “Snowy Mountains
Hydro-electric Authority”, has been particularly valuable to
those irrigators and farmers who understand best the
climate and weather risk, and the year-on-year variability of
rainfall. It has been particularly beneficial for irrigators and
town and country economies in the last three years of
worsening drought and uncertainty. This is water supply risk
management by Snowy Hydro Limited in practice.
This supply risk management service is increasingly being
valued by the irrigators, particularly on the Murrumbidgee.
Electricity
With regard to electricity, profound change has occurred
due to the creation of a National Electricity Market in 1996,
and the very substantial growth in the demand for
electricity, particularly at peak times (due mainly to the
widespread installation and use of air conditioning).
Snowy Hydro Limited should not now be thought of as a
generator of electricity – we only generate 14% of the time
– the reason being that we conserve water where we can,
biasing our releases to better “fit” environmental concerns
and irrigator/farmer needs, having identified future possible
climate change impacts some six years ago. We are now a

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generator of last resort rather than a generator of electricity
to earn revenue to meet a budget. This thinking means we
can be a more effective (and co-operative) water manager
while achieving better financial outcomes for our
shareholders.
Let me explain briefly how we do this risk management
thing with regard to electricity.….
Retailers charge you for the electricity you use. The price
per unit is constant over the medium term, say $50.00 per
MWh. But the retailer has first to buy the electricity sold to
you…..but the price to be paid by the retailer can vary
between $zero and $10,000.00 per MWh and it can vary
every 5 minutes as the market operates on a bidding
system. Now the retailer cannot pass on the price
movement to you, the consumer, so the retailer takes out
insurance against such rapid and large price movements.
We, Snowy Hydro Limited, provide the insurance policy or,
as we call it, a financial hedge contract. If the price goes
above what the retailer is willing to risk having to pay, then
we pay the retailer the difference in the form of cheques
that offset the price over and above the level the retailer is
willing to buy at over the long term. We can do this because
we have fast start equipment that generates in minutes and
we then earn the prevailing higher price for the electricity
that we put into the National Electricity Grid, fully offsetting
the cheques we have paid out to the retailer. And for this

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price risk mitigation the retailer pays us a substantial and
long term “insurance premium”. It works well for us, it works
very well for the retailers and it keeps your electricity prices
from fluctuating widely and arguably from the prices
increasing due to the risk that would otherwise have to be
priced in to the cost of electricity. This is electricity price
risk management by Snowy Hydro Limited in practice.
So you can now see we do something similar for both the
water side of our business, the irrigators, and for the
electricity side of the business, the electricity retailers and
thus indirectly for the individual electricity consumer – it is
called managing supply risk for the irrigators and managing
price risk for electricity retailers and consumers.
That explains how far we have evolved from being the
simple Snowy Scheme electricity generator and we have
evolved this way because the electricity market was created
in 1997 and because environmental and climate conditions
and expectations have changed, and also because the
users/consumers and the industry technologies have
required and arguably forced us to evolve and adapt.
Viewed from both a water user’s perspective and from an
electricity consumer’s perspective we are now an
“insurance” company..…we manage other people’s risks.
The critics of the planned listing of Snowy Hydro Limited on
the ASX (IPO), last year, I would suggest, have not
understood the changed market and customer needs and

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demands. Nor have they understood the safeguards built
into our water licence and other guiding legislation.
Fortunately, the designers and builders of the Snowy
Scheme had an abundance of foresight and vision even if
they could not have known precisely what would be
expected of their Scheme and its capabilities today and
tomorrow. It should be well noted that because of the new
and changing roles demanded of the Company, ie
managing risk, governments are arguably not appropriate
owners any more – there is too much risk in the markets we
now critically and unavoidably serve.
Contrary to the misinformation put about at the time of the
IPO, the evolution of the National Electricity Market and the
establishing of Snowy Hydro Limited with a strong profit and
a reinvestment motivation has turned our role from being an
electricity generator, incidentally releasing water, to a
company well able and needing to balance water and
electricity demands to the benefit of all stakeholders,
including shareholders, whoever they may be.
In summary, it is a given that we will meet our water release
obligations to irrigators/farmers on the western rivers, and
we also run the business to meet our obligations to the
electricity users across the National Electricity Market but
we try to limit our generation to only peak demand times –
and in this way we make sound profits in order to pay
attractive dividends to our Government shareholders or

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future investors. The way we run the business today is how
any competent private sector company would run it.
But to play this new role and to do all this we have to
maintain a strong credit rating or the retailers will not deal
with us and the business will decline with all the usual
implications – and in turn in order to maintain a strong credit
rating we have to be profitable and diverse in capability.
Governments do not provide us or our customers with
guarantees to back our debt. Government do not want to
put more funds into the business.
We have to be profitable in order to have a sufficiently
strong cash flow just to maintain our assets, dams, pipes,
power stations etc at a very high, reliable and safe standard
and we have to continually upgrade our very complicated
and sophisticated communications and control systems,
which operate in a harsh environment across 5,000 square
kilometres of the Snowy Mountains. Remember, our
shareholder Governments do not put cash/equity, or debt,
into our Company; they only take out dividends.
Like any business we have to grow as our markets grow,
we have to offer secure employment, we have to maintain
our assets and we have to keep pace with the very
sophisticated technology used by the market managers, by
our customers and by our competitors and we have to
invest to ensure a safe work environment for our people.
And increasingly we have to provide water, at no cost, for

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environmental flows. All this requires that we make profits
and it also requires that we should have access to new or
additional equity or new debt, both of which were denied to
us with the withdrawal of the planned listing of Snowy Hydro
Limited on the ASX last year. Those that spoke loudest in
order to stop the IPO are now silent on how to solve the
problem they have caused.....Snowy Hydro Limited is
suffering starvation of capital!!
Over and above keeping the existing business at the
standards we have achieved since corporatisation, we now
have other pressing reasons to need capital…..related to
meeting the threat of climate change.
We have a scarce resource, water, and we foresee greater
variability in future weather patterns and behaviours –
bushfires, longer dry periods, hotter weather over more
often continuous days. To conserve water for when it is
needed most we need greater flexibility in how we generate
electricity, in when within the year we release water into the
New South Wales Government/Murray Darling Basin
Commission dams and, when and to what extent, we
continue to make whatever special arrangements we can
make for irrigators by better planning timing of releases of
water etc – above all, we need new and additional
generation capacity and additional fuel flexibility so as to be
able to best meet the often conflicting requirements for

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water release and electricity needs. These needs will only
get more demanding and more complicated and urgent.
The answer to this future potential dilemma is not more
dams. It is the building of gas fired electricity generation
plant that will substitute for using water for generation –
using gas as the fuel rather than scarce water, saving the
water for release not when required primarily by electricity
needs but when required for irrigation and water storage
needs. It makes obvious sense to sometimes use gas
instead of water as our “fuel”.
Snowy Hydro Limited adopted this fuel substitute vision four
years ago when it ceased to be “The Authority” and now
has over 600 MWs of gas fired electricity generation plant in
Victoria with plans to develop plant in South Australia and
New South Wales. If we can get the necessary capital.
Just to conclude, and as a point of interest, Snowy Hydro
Limited is now also an electricity retailer – we market as
RED ENERGY, based in Victoria. RED is wholly owned by
Snowy Hydro Limited and you will soon see the brand
marketed in country New South Wales. It is also now
marketing in South Australia. This move into retail further
protects the Snowy Scheme from declining relevance in a
growing and changing electricity market. Particularly as we
see our customers growing as vertically integrated
electricity suppliers.

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Snowy Hydro Limited has come a long way since the days
of the Commonwealth Government owned Snowy
Mountains Hydro-electric Authority – it has terrific people,
well incentivised and motivated to do a good job for all its
stakeholders and clearly it is demonstrating it can achieve
very good outcomes in the extraordinarily difficult times of
the last few years…..now that it can operate largely as a
private sector company supporting private sector customers
and stakeholders.….now that Snowy Hydro is free to
operate as would a private sector company serving a
diverse range of customers and needs. But…..the future is
clouded by a lack of access to capital, either debt or equity,
because in this regard it is not fully “private sector” – a
constraint that must be remedied if the Company is to
deliver on the Snowy Scheme’s original vision and on the
“mission” as it has evolved over the years.
We respect our history but we think in the future as those
who built the Scheme did!! Snowy Hydro must eventually
be given the other leg that underpins any successful private
sector company – we have water licence obligations that
protect farmers and irrigators and we have legislated
obligations for water environmental releases – now we need
the ability to raise capital from whoever our shareholders
may eventually be; to raise funds to grow to meet the
changing needs of all our stakeholders.